Concerns Regarding Recent Ruling Against the Fearless Fund’s Grant Contest
We’ve been getting inquiries from clients regarding the recent ruling against the Fearless Fund’s grant contest by the U.S. Court of Appeals for the 11th Circuit. By way of background, the Fearless Foundation is the 501(c)(3) arm of the Fearless Fund, a venture capital firm that provides capital, community, mentorship, and education to women of color entrepreneurs seeking pre-seed, seed level or series A financing. On August 2, 2023, the nonprofit membership organization American Alliance for Equal Rights (AAER) filed a complaint on behalf of three of its unnamed members in the Northern District of Georgia against Fearless Fund and related entities—including Fearless Foundation. The lawsuit alleged that a grant program run by Fearless Foundation violates 42 U.S.C. Section 1981, a federal statute enacted as part of the Civil Rights Act of 1866 that prohibits discrimination on the basis of race in the making or enforcement of contracts. Passed during The Reconstruction-era, the law was originally intended to protect formerly enslaved people from economic exclusion. However, today anti-affirmative action activists are using it to challenge programs intended to benefit minority-owned businesses.
The ruling reversed a federal judge’s ruling last year that the contest should be allowed to continue because it was determined that the lawsuit was likely to fail. However, in a 2-1 ruling, the panel of the U.S. Court of Appeals for the 11th Circuit in Miami found that AAER was likely to prevail in their lawsuit claiming the grant program violates 42 U.S.C. Section 1981 of the Civil Rights Act.
According to Roger Colinvaux in the Chronicle of Philanthropy, “
“The appeals court decision was, in the end, a form of judicial activism that aims to rewrite a law that has stood since the reconstruction era. Any such dramatic expansion of a civil rights statute should only be done by Congress, not through new and unprecedented interpretations by courts.” And “Charity is, by definition, exclusive: Not everyone is eligible for it. But instead of considering the context of the Fearless Foundation program, the court likens the organization’s conduct to regular commercial activity, such as hiring employees, which it is not.”
At its core, it appears that the ruling indirectly attacks the ability of charitable organizations to fulfill their missions. Here’s the rub; the court’s ruling ignores a key aspect of the case: the Fearless Foundation is a charity, and fulfills its charitable purpose to address the historic inequities in access to capital faced by women of color entrepreneurs by providing capital and support. Alphonso David, Fearless Fund’s legal counsel, who serves as president & CEO of the Global Black Economic Forum explained,
“Charitable organizations have been issuing grants to specific demographic groups for decades. And this is the first time that a federal court is stopping an organization from issuing grants to a specific demographic group, issuing grants consistent with their mission.”
I’m not an attorney, but it seems to me that the mission of the Fearless Foundation should be protected as a form of speech under the First Amendment. As Colinvaux states in How the Fearless Fund Ruling Distorts Charity, History — and Law:
“The court’s failure to recognize the charitable nature of the grant contest oversimplifies the issue and undermines decades of nonprofit law and practice. Taking race into account for philanthropic purposes has been a part of charity since at least the 1950s, when the “elimination of prejudice and discrimination” became legally recognized as a charitable purpose. The court’s ruling disregards this history and the original intent of Section 1981, which was enacted to eliminate the vestiges of slavery.”
This isn’t over by a long shot, as courts will likely disagree with the 11th Circuit’s overreach. In the meantime, how should the leaders of CDFIs and their funders and stakeholders respond? How about making more loans and equity investments to women of color entrepreneurs?
